Tuesday, July 26, 2011

Aqumin just finished a successful run in New York City at the FinTech Innovation Lab sponsored by the New York City Investment Fund and Accenture with some of the larger investment banks (see this link: http://gigaom.com/2011/07/22/fintech-start-ups-wield-data-and-smarts/ or search for Aqumin FinTech Innovation Lab). It was a great opportunity to grow the company and we started pilots in several of the top banks. The idea is you use Aqumin technology to look for things that are not readily apparent and control risk or trade appropriately. The example below with the Gold Stocks is a case in point.

Panning for Gold

The Debt Crisis is getting all the headlines. The last time I checked Uncle Sam still generates enough revenue to cover interest payments. Perception scares the market and in the current climate the debate causes anxiety that is still too fresh in everyone’s memory. Market participants are a little spooked, so gold prices continue to make all time highs. That is headline news. I have a standard view that looks at 3 Month Implied Volatility against the 2 year lows of 3 Month Implied Volatility. Generally I care when that number gets to within 10% of its two year low. The view below is just a snapshot of that result.

The height of each equity building is the one day price change. Note yesterday had some activity but what I wanted was a place where current movement was not affecting implied volatility. A collection of red buildings have longer term 3 Month Implied Volatility trading within 10% of their two year lows. I was mostly interested in a larger group of names (lots of flat, red buildings) to see if any particular sector was in the volatility basement. To my surprise much of the Metals and Mining GICS Industry Names were there. Mainly the Gold Miners and Steel Producers filled the bottom. This surprised me.

When implied volatility gets very low on a longer term basis, the market is usually taking out one side of the equation. Can the price of gold keep going up? Is the Debt Crisis really a Debt Crisis? You would think with all of the near panic these levels in the Gold Stocks would be much higher. Also, I concede a run up in the names automatically pushes the Implied Volatilities down. But a crisis would spur a greater flight to Gold and the longer term implied volatility says no. So what to do? Standard trading practice says when implied volatility is cheap you buy it. In the current case with the Gold Stocks you simple buy volatility as an asset. A combination of Delta Neutral calls and puts in the farther out months generally would do the trick on a few select Gold Stocks. This way you hedge both the “Debt Crisis” and possible slide in Gold should the dollar start to regain value through the miracle of fiscal responsibility. Buying Gold Stock Volatility at near bottom prices means you don’t have to spend much for the privilege.

FYI- the GLD and GDX ETFS’ are trading 19% and 14% of 3 Month Implied Volatility two year lows.

Tuesday, July 19, 2011

Just when you thought the Aqumin Volatility News Letter disappeared, you get something new in your inbox. The fact is Aqumin has been busy with opening an office in New York City and I have had zero time to monitor the market as we expand the business. I even had to halt my side job for TheStreet’s Option Profits with a solid run (79%+ win rate with all posted in print) there using AlphaVision™. Either way I wanted to take a look at the market again with the “Debt Crisis” going nowhere and Google’s (surprise!) return to big time profits and growth.

Most traders use a variety of cues and alerts to set off a trade or adjust a position. Using AlphaVision™ as a 3D Quoting System just means alerts are broader (you see the larger universe too) and cues are opportunity driven. Simply, you do not know what you are going to get when you pull up a view (which is where I think the edge is). I chose a set up of 30 Day Historical Volatility and 1 Week Price Total Return using Bloomberg Data.

The tall, spiky buildings have 30 Day Historical Volatility of 40% (Dark Green alert color) or more and 10% or more in 1 Week Total Return. Front and center is GOOG on news and earnings pop. Clearly a surprise for the market but what else looks close? That would be the standout Energy GICS Sector Group. Many of those names took off after a takeover in the group. At least for the S&P 500 (in this view) it is clear where the money is pouring into with pretty solid upward momentum (higher overall HV).

To me it looks like the Energy GICS Sector is getting a little ahead of itself, especially when compared to the rest of the S&P 500 and the one off GOOG move. I not saying run in front of the train but writing some out of the money calls or fitting some collars with the run up might not be a bad idea for holders of some of these names who have enjoyed the rally.

I normally would have stopped there with the post. But a secondary observation on how sustainable 40% 30 Day Historical Volatility is for the Energy names would be interesting. The new functionality in AlphaVision™ for Excel (we are shipping now) really helps the drill down after you have had a nice horizontal quote with the standard AV for Bloomberg Landscape. In the screenshot below I dug into all of the GICS Energy Stocks to look at 30 Day Historical Volatility to see if what I am noticing today is significant. Each Time Series Graph (left to right for the past year) shows 30 Day Historical Volatility (HV30) where my cut off is 40% on the upside (Dark Green) and 20% on the downside (Dark Red).

The names in this group don’t get over 40% HV30 very often (except for ANR). Last summer (far left of the 3D chart) when things were melting you notice the Dark Green “Euro Contagion.” Since then only select times when the HV30 pops above 40% for any particular Energy name in the S&P 500. Notice the trough in HV30 around January of this year. How did I come up with 40% on the upside? I just moved the slider bars in the interactive part of AV until I saw a significant level.

Looking at this 3D Time Series and with the run up in the Energy stock prices this is certainly better levels for selling volatility so let’s see how long the movement can last. But as I noted earlier, might be a good time to write some calls against existing positions.